Disability Insurance Quiz: Trivia!

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Disability Insurance Quiz: Trivia! - Quiz

Disability insurance is the type of coverage that safeguards the beneficiary’s earned income versus the risk that a disability creates an obstacle to completing essential work functions. In this quiz, you will be responsible for knowing things like which provision of long-term care policy is most important. Most of the quiz contains complex word problems about disability insurance. Don’t hesitate to take your certificate when you have finished the quiz.


Questions and Answers
  • 1. 

    Your client, a trial attorney, lost his voice a year ago. He now works for a law firm doing trial research only. He is upset because his disability company won't pay disability benefits. After you review his policy, what is your advice to him?

    • A.

      He has an own occupation policy.

    • B.

      A dual definition policy.

    • C.

      He has a loss of income policy

    • D.

      He has an any-occupation policy.

    Correct Answer
    D. He has an any-occupation policy.
    Explanation
    Given a choice, Answer D is the best answer because he is still practicing as an attorney. Actually both Answers C and D could be correct.

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  • 2. 

     Assume the prior question continues. The trial attorney had been making $240,000 a year and had a disability policy with a total disability benefit of $10,000 per month. Due to voice problems, his practice was suffering (prior to losing his voice altogether), and his income decreased by approximately one-half to around $120,000 over the last year. Since completely losing his voice, the attorneys' firm has been paying him $15,000 per month to do research. The insurance company has denied his claim.    After you review his policy, what is your advice to him?  

    • A.

      He has an own occupation policy

    • B.

      He has a loss of income policy

    Correct Answer
    B. He has a loss of income policy
    Explanation
    The disability insurer will review his earnings history for the prior 2 years. For example, the benefit of $10,000 per month is equal to his earnings at the time he lost his voice ($120,000). The carrier might not pay $10,000 per month (100% of his earnings). This is an industry answer. The carrier would say he had no economic loss. Actually, the policy should pay because of presumptive disability (loss of speech), but that answer is not a choice.

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  • 3. 

    Dr. Ted Swan bought a guaranteed renewable policy at age 34.  Now 20 years later, the carrier doubled his premium. What are his options?

    • A.

      To pay the original premium

    • B.

      To lapse the policy

    • C.

      To buy a new policy at a cheaper premium.

    Correct Answer
    B. To lapse the policy
    Explanation
    Under guaranteed renewable, Dr. Ted's only choice (other than to lapse the policy) is to pay the higher (not original) premium. A new policy would also entail higher premiums. New policies are age sensitive, and he is 20 years older. The new policy cost would likely be more than double the existing policy premium. Nothing is gained.

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  • 4. 

    Bob, a CPA, went through some hard economic times in his 60s. Now at 65, his disability policy is about to expire. Unfortunately, he still needs disability coverage. What are his options?

    • A.

      None

    • B.

      Buy a new policy

    • C.

      Exercise his conditionally renewable provision

    • D.

      Sue his agent

    Correct Answer
    C. Exercise his conditionally renewable provision
    Explanation
    He will be able to extend coverage beyond age 65 (conditionally renewable provision.

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  • 5. 

    Mr. V (salary $90,000) has only $3,000 per month of disability benefits.  The "non-can" policy has a 5-year maximum benefit, own occupation, and a 90-day wait.  What can Mr. V  do to improve this or another policy without substantial changes in premium?

    • A.

      Purchase a policy with increased benefits payable until age 65 but change the definition to any occupation

    • B.

      Purchase a policy with increased benefits payable until age 65 but increase the elimination period to 120 days

    • C.

      Purchase a policy with increased benefits payable to age 65 but change to a guaranteed renewable policy

    • D.

      Increase the benefits of the existing policy

    Correct Answer
    C. Purchase a policy with increased benefits payable to age 65 but change to a guaranteed renewable policy
    Explanation
    Generally a guaranteed renewable policy is less expensive than a non-cancellable policy. This is because the insurer may increase the premium later. Answer A worsens the policy. Answer B, increasing the elimination period, will not offset the premium cost of increasing the benefits and making benefits payable to age 65. Answer D is wrong because you cannot increase the benefits of an existing policy. A new policy must be issued. There is no other answer.

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  • 6. 

    An insurance agent makes a recommendation that his client needs $5,000 /mo . in individual disability benefits.  The client agrees to buy a policy.   The agent will need to obtain all of the following information for the insurance underwriter except which of the following?

    • A.

      Client's earned income (W-2 or 1099s) and unearned income

    • B.

      Client's net worth

    • C.

      Client's existing disability coverage (including group coverage with ER).

    • D.

      Client's complete cash flow

    Correct Answer
    D. Client's complete cash flow
    Explanation
    Disability underwriting requires much more financial underwriting than life insurance policies. The carriers will issue a policy based on earned income offset by unearned income. The applicant may be required to submit a complete financial statement (assets/liabilities but surprisingly not a cash flow statement). The underwriter is interested in both earned and unearned income.

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  • 7. 

    Dr. Quinn buys a disability policy with a base benefit of $5,000 and a SIS benefit of $1,200. Dr. Quinn is disabled and ultimately receives $600 in Social Security disability benefits. How much benefit will she receive from her policy when Social Security pays $600?

    • A.

      $600

    • B.

      $5,000 / mo.

    • C.

      $5,600 / mo.

    • D.

      $6,200 / mo.

    Correct Answer
    C. $5,600 / mo.
    Explanation
    The $1,200 policy SIS benefit will be reduced by $600. Remember she always gets her base plan benefit ($5,000).

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  • 8. 

    What happens if Social Security turns her down?

    • A.

      $600

    • B.

      $5,000 / mo.

    • C.

      $5,600 / mo.

    • D.

      $6,200 / mo.

    Correct Answer
    D. $6,200 / mo.
    Explanation
    She gets the full $1,200 plus the base ($6,200)

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  • 9. 

    What happens if Social Security pays $1,400.

    • A.

      $600

    • B.

      $ 5,000 / mo.

    • C.

      $ 5,600 / mo.

    • D.

      $6,200 / mo.

    Correct Answer
    B. $ 5,000 / mo.
    Explanation
    She will only receive her base ($5,000). Social Security benefits will not reduce her base plan. Social Security will pay the $1,400, not the insurance policy. The question is asking about the policy.

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  • 10. 

    Vickie owns an S corporation.  The corporation pays her individual disability insurance premium under a salary continuation agreement. Which of the following is true? 

    • A.

      The benefits are tax-free to Vickie.

    • B.

      The benefits are taxable to Vickie.

    • C.

      The Corporation cannot deduct the premium.

    • D.

      The premiums paid by the corporation are not a tax consequence to Vickie.

    Correct Answer
    A. The benefits are tax-free to Vickie.
    Explanation
    The corporation can deduct the premium. The S corporation charged her with the premiums paid.

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  • 11. 

    A company has a formal salary continuation plan using individual disability policies. Due to cash flow problems, the company changes the plan to an informal plan. (Premium is a bonus to the employee.) How will the insurance premiums paid and the insurance benefits be treated? 

    • A.

      Tax-deductible premiums paid by the company, tax-free benefits to the employee.

    • B.

      Non-deductible premiums paid by the company, tax-free benefits to the employee.

    • C.

      Nondeductible premiums paid by the company, taxable benefits to the employee.

    • D.

      Tax-deductible premiums paid by the company, taxable benefits to the employee.

    Correct Answer
    A. Tax-deductible premiums paid by the company, tax-free benefits to the employee.
    Explanation
    With a formal plan, the employer pays the entire cost. The premiums paid are tax deductible by the company then the benefits are included in an employee's gross income. With an informal plan, the employer uses an employee bonus to pay the insurance premium on selected employees. The employee pays income tax on that bonus. Be careful, premiums paid and benefits paid work opposite. If one is tax deductible (premiums) and not taxable to the employee, then the benefits the employee gets are taxable.

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  • 12. 

    Terry is both a shareholder with Able, Inc. and the VP of sales. The company wants to offer a private incentive plan for Terry. They only want to informally fund the plan for Terry and a few select other key employees using disability insurance.   Since only selected employees are eligible, Able will pay the insurance premium with a salary bonus to those employees. Which of the following is true?

    • A.

      If Terry becomes disabled, the disability benefits are taxable.

    • B.

      The company cannot deduct the premium.

    • C.

      The company can deduct the premium.

    • D.

      An informally funded incentive plan is typically funded with life insurance rather than disability insurance.

    Correct Answer
    C. The company can deduct the premium.
    Explanation
    The company is paying Terry's disability insurance and charging him with the income (the bonus) which is subject to tax. If Terry becomes disabled, the benefits will be tax-free. Answer Dis true but doesn't answer the question.

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  • 13. 

    Nick works for XYZ corporation as a sales manager.  The company has a salary continuation disability insurance program, and it pays the full premium.  Nick's benefit under the plan is $10,000 per month.  Calculate Nick's net-of-tax monthly benefit if his tax bracket is 36% during disability. 

    • A.

      $3,600

    • B.

      $5,000

    • C.

      $6,400

    • D.

      $10,000

    Correct Answer
    C. $6,400
    Explanation
    Benefits are taxed at 36%, he nets 64%.

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  • 14. 

    What would the answer be if Nick (Q4) paid the premium in full?

    • A.

      $3,600

    • B.

      $5,000

    • C.

      $6,400

    • D.

      $10,000

    Correct Answer
    D. $10,000
    Explanation
    The benefits would be tax-free.

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  • 15. 

    What would the answer to Q4 have been if XYZ offered a Section 162 arrangement?

    • A.

      $3,600

    • B.

      $5,000

    • C.

      $6,400

    • D.

      $10,000

    Correct Answer
    D. $10,000
    Explanation
    Premiums paid under Section 162 are an allowable business expense. Under this arrangement the business pays a bonus to the employee to pay the premium. 162 is nothing more than a bonus.

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  • 16. 

    Sherry has a choice between two disability policies.  She is healthy, has a professional and stable job, and is single.  She will pay the premium and needs the coverage for a long time.   Policy APolicy B$3,000 per month of benefits 90-day waitBenefits to age 65 Noncancellable  Own occupationPremium:  $3,900 per year$4,000 per month of benefits 30-day waitBenefits to age 65 Noncancellable Any occupationPremium:  $3,000 per year         Which policy would you recommend based on these descriptions? 

    • A.

      Policy A because of its own occupation definition of total disability

    • B.

      Policy B because she is healthy and the premium will be substantially less over time.

    • C.

      Policy A because a good, stable job should allow her to begin self-insuring for disability.

    • D.

      Policy B because it has a 30-day wait and the premium will be substantially less over time.

    Correct Answer
    A. Policy A because of its own occupation definition of total disability
    Explanation
    "Own occupation" is the best answer on the exam. If she has a professional and stable job, she must be educated and can do some other (any) occupation.

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  • 17. 

    Linda Hale is single age 35. Her mother just died of a disability.   Linda's father died some months before her mother. Her father had been Linda's mother's caregiver. When her father died, Linda had to take a leave of absence from her job to take care of her mother. Fortunately, Linda's father had left enough money to allow Linda to take care of her mother but there was nothing left at her death. Linda's savings were also depleted over these past few months.  Linda just went back to her prior employer and they are willing to rehire her.   Her job is semi­ professional with good chances for advancement.            Considering she has done no planning and her employer has limited benefits, what planning would you stress the most?

    • A.

      Re-establish a 3 month emergency fund.

    • B.

      Buy the best individual disability insurance policy available to her.

    • C.

      Establishing a budget and save at least 10% per year for retirement.

    • D.

      Buy a condo or house while mortgage interest rates are low.

    Correct Answer
    B. Buy the best individual disability insurance policy available to her.
    Explanation
    She is single and at this point totally dependent on being able to work. Answers A and Care also important but putting disability first is the best choice. In addition, she needs 6 months of her fixed and variable expenses as an emergency
    fund . Based on her family's history, disability should be her primary concern . Look at sentence 2 in the question.

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  • 18. 

    Which provision of a long-term care (LTC) policy is most important? 

    • A.

      Coverage for Alzheimer's disease

    • B.

      Guaranteed renewable

    • C.

      Custodial care

    • D.

      Inflation protection

    Correct Answer
    D. Inflation protection
    Explanation
    There can be no exclusion for Alzheimer's disease (HIPAA). The policy must be guaranteed renewable (HIPAA). Most policies have custodial care. Inflation protection would seem the most important. If you bought a policy at age 60 with a $200 per day benefit, what would that benefit be worth in 15-20 years if it was fixed at $200 per day?

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  • 19. 

    Which of the following is true about long-term care insurance?

    • A.

      Premiums paid are deductible in full.

    • B.

      Unreimbursed expenses are subject to 10%-of-AGI floor.

    • C.

      Premiums paid are included as fully deductible medical expenses subject to 10%-of-AGI floor.

    Correct Answer
    B. Unreimbursed expenses are subject to 10%-of-AGI floor.
    Explanation
    Premiums are not fully deductible. The amount of deductible premium depends on the client's age (Answers A and C). For example, above age 61 - 70 is $4,090 (2017).

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  • 20. 

    Qualified long-term care policies have all of the following characteristics except which of the following?I.  Must be non-cancellableII. Limited premium deduction based on age (only if itemizing).III. Must provide skilled and Alzheimer's care.  There is no daily limit for skilled care only.

    • A.

      All of the above.

    • B.

      I

    • C.

      II

    • D.

      I, III

    Correct Answer
    D. I, III
    Explanation
    HIPAA requires that LTC policies must be guaranteed renewable. There is no requirement that they be nlable, but they could be nlable. II is correct. However, the income tax deduction (which is subject to a 10% of AGI floor) is further limited to dollar amounts that increase with age. Benefits received tax-free are subject to a dollar cap ($190 a day, as adjusted) regardless of the type of covered care.

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  • 21. 

    Which of the following are true about what Medicare will cover in regards to long-term care? I.  It will pay up to the first 80 days of skilled care. II. During first 20 days, a cop-payment is payable. III. A hospital stay of 3 days consecutively is necessary to qualify for coverage. IV. The care needed must be defined to be skilled care. V. More than 30 days can lapse between the hospital stay and admittance to a skilled nursing facility.

    • A.

      I, III, IV

    • B.

      I, III, V

    • C.

      II, III

    • D.

      III, IV

    • E.

      III, V

    Correct Answer
    D. III, IV
    Explanation
    Coverage is up to 100 days; the first 20 days is paid in full. Answer V is wrong. The time element is less than 30 days.

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  • 22. 

    Other than LTC insurance, what other means provide nursing home care coverage for longer than 100 days?

    • A.

      Medicare

    • B.

      Medicaid

    • C.

      Medicare supplement policy

    • D.

      Medigap insurance

    Correct Answer
    A. Medicare
    Explanation
    Medicare is limited to 100 days. A Medicare supplement policy or a Medigap policy may provide for a rehabilitation stay but not for nursing home coverage.

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  • 23. 

    Mr. Beaty, age 54, and Mrs. Beaty, age 52, are considering purchasing LTC insurance.   Their earned income and assets are average for their age bracket.  They are concerned that a lengthy period of long-term care could wipe out their assets. Which of the following policies would you suggest?

    • A.

      30-day elimination period, 3-year benefit period

    • B.

      60-day elimination period, 4-year benefit period

    • C.

      90-day elimination period, 6-year benefit period

    • D.

      180-day elimination period, 6-year benefit period

    • E.

      365-day elimination period, lifetime benefit period

    Correct Answer
    D. 180-day elimination period, 6-year benefit period
    Explanation
    This combination of elimination period and benefit period seems the best choice. The clients have normal income. This is the best premium and coverage combination for a couple in their 50s considering the 5-year rule in Deficit Reduction Act (prior information).

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  • 24. 

    Mr. Baker owns Baker Industries, Inc. which is an S corporation. The Corporation pays the premium of Mr. Baker's personally owned disability policy. Which of the following are true? I.  Baker Industries can deduct the premium II. Benefits payable to Mr. Baker under the policy will be tax- free

    • A.

      I

    • B.

      II

    • C.

      Both

    • D.

      Neither

    Correct Answer
    C. Both
    Explanation
    The premium payment passes through to Mr. Baker as taxable income (conduit principal). He pays taxes on it; therefore, the benefits are tax­ free.

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  • 25. 

    Mr. Jensen, age 58, got married late in life to a younger lady. Now he is concerned that he may not be able to retire until 70. She has two younger children, 16 and 12, who want to attend college and then go onto law school or become doctors. His wife has informed him that he will have to pay for the education. He is an attorney with a reasonably successful practice.    He is worried about his disability insurance.     Which would give him the greatest concern?

    • A.

      Definition - own occupation

    • B.

      Guaranteed renewable

    • C.

      Elimination period - 120 days

    • D.

      Benefit amount - 50% of salary

    • E.

      Benefit period - to age 65

    Correct Answer
    E. Benefit period - to age 65
    Explanation
    Answers A, C, and D are the best he could get. Guaranteed renewable (carrier can change the premium) is a concern but the benefit period is his greatest concern. He may need coverage to age 70.

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